We invested in UTX (NYSE:UTX) because it owns market-leading businesses with favorable long-term growth trends in an unwieldy conglomerate format which traded at a large discount to the sum of its parts. We believed that a tax-free separation of these three businesses would eliminate the company’s significant sum-of-the-parts discount and highlight the value of its crown jewel asset, its aerospace business. We exited our position in UTX this quarter with a modest gain of 3% after the company announced a value-destructive stock merger of its high-quality, high-growth aerospace business with a lower-quality, lower-growth defense contractor, Raytheon, at a valuation that represented a significant discount to the intrinsic value of UTX’s aerospace business. (12)
After acquiring a stake in the company last year, we met with management to express our view that a separation would create substantial shareholder value. We were therefore pleased when the company announced a breakup late last year. We were, however, surprised and disappointed to read rumors of an imminent transaction with Raytheon in early June, which was antithetical to the company’s articulated rationale for the previously announced breakup. In response, we immediately wrote a letter to the board to express our strong concern and opposition to the potential transaction. After the company proceeded with the transaction over our objections, we decided to sell our position.
Although we could have run a campaign to block the transaction over the next six or more months, our loss of confidence in management would have also required us to engage in a more comprehensive battle to replace the company’s leadership, and perhaps a portion of the board, in order to be comfortable with the company’s future capital allocation decisions, strategic direction, and oversight. After carefully considering the significant organizational time and effort that would be required to merely restore the value that will be destroyed by the transaction, we decided that it was more productive to sell our stock at a small profit and focus our efforts on finding new opportunities.
From Bill Ackman (Trades, Portfolio)'s second-quarter 2019 Pershing Square shareholder letter.
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